Economies set their terms on inflation rates in tandem

Tim Parker
Posted by Tim Parker
Posted on August 10, 2021 Leave a comment

Economies are closely intertwined as globalisation rapidly increases. Taking a global, in-depth look at what is happening beyond the UK gives us all an indication of what we can expect to happen closer to home. As we become more and more connected and borders start to blur, we can see future trends into how we might all live our lives or how we might all interact with cash.

Take the US Federal Reserve’s much-awaited interest rate meeting that happened last month - they are just one central body making decisions on interest rates as economies respond in different ways to the coronavirus crisis. The Federal Reserve is on record as viewing the current rise in inflation as transitory, therefore not requiring an immediate policy reaction.

It’s interesting to see so many economies set their terms on inflation rates in tandem. As Bloomberg stated: “Including the U.S., rate-setting on five continents, for a quarter of the Group of 20 and covering more than a third of global economic output, is likely to show how some institutions are more concerned about inflation taking hold, while others would dearly like to see that happen, to a degree at least.” (You can also see Bloomberg’s charts and graphs on interest rates in the article linked above).

As we have seen interest rates ticking up in previous days in the UK (with many platforms insisting and publications pushing for consumers to act fast on taking advantage of the rates available), economists have suggested that inflation may exceed 3% later this year. Yet the Bank of England forecasts it will be more like 2.5% - either way above the 2% target set. On Thursday 5th August, the European Central Bank held monetary policy steady, with interest rates left unchanged and remaining at their current record lows, and upgrading its inflation target to 2% over the medium term. In the US, Reuters noted: “The consumer price index increased 0.9% last month, the largest gain since June 2008, after advancing 0.6% in May. Economists polled by Reuters had forecast the CPI would climb 0.5%.”

With this in mind, we will be keeping a close eye on what happens with interest rates - as trade negotiations between countries continue, the behaviours of consumers adapt to the end of lockdown and the workforce picks up, economists and institutions will be making their best predictions for what will happen in the next few quarters, however, it is anyone’s guess on what might happen over the coming months, and how that will affect the economy, inflation rates, and in turn, consumers looking to save and borrow from their banks.

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